Glossary · UK
What is Controlled Foreign Company (CFC) Rules?
UK tax rules that can charge Corporation Tax on the profits of an overseas subsidiary if those profits have been artificially diverted away from the UK parent company.
Full Definition
The Controlled Foreign Company (CFC) rules are UK anti-avoidance rules that can bring the profits of an overseas subsidiary -- one that is "controlled" by a UK company, broadly meaning the UK parent holds more than 50% of it -- back into charge for UK Corporation Tax, where those profits have been artificially diverted from the UK, for example by relocating income-generating assets such as intellectual property, financing arrangements or intra-group contracts to a low-tax overseas subsidiary with little genuine business activity of its own. The rules work through a series of specific "gateway" tests, covering situations such as diverted trading profits, non-trading finance profits (typically intra-group loans) and profits from intellectual property, and a subsidiary that fails a gateway test can have some or all of its profits apportioned back to the UK parent and taxed accordingly, subject to various exemptions. Several exemptions exist to keep the rules targeted at genuine avoidance rather than ordinary overseas trading: these include a low-profits exemption, a low-profit-margin exemption, an exempt-period exemption for newly acquired subsidiaries, and exemptions for subsidiaries in territories with a headline tax rate close to the UK's. Because CFC rules exist in many countries, often modelled on the OECD's BEPS Action 2 recommendations, a UK group can face CFC-style charges both in the UK on its foreign subsidiaries and, in principle, from other countries applying similar rules to their own group structures, which is one reason multinational tax planning has moved firmly towards arrangements with genuine economic substance in each jurisdiction.